US Telecom Market Dynamics


US Telecom Market Dynamics










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US Telecom Market Dynamics

by Faulkner Staff

Copyright 2017, Faulkner
Information Services. All Rights Reserved.

Docid: 00021163

Publication Date: 1706

Report Type: MARKET

Preview

The United States telecommunications industry is quickly moving to a position
where a small number of companies are consolidating most of the power in the
market. AT&T and Verizon have been growing steadily since the government broke
up AT&T’s monopoly in the 1980s, and their increasing role in the market has
forced smaller players to consolidate in order to keep up. The true competition,
however, is coming from the cable industry, which has been going through its own
wave of consolidation. In what many consider to be a much looser regulatory
environment than the past several administrations have provided, the telecom
industry may be approaching one of the greatest periods of consolidation in its
history.

Report Contents:

Executive Summary

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The US telecom market is a complex aggregation of many
players operating in a variety of niches that developed in
response to the 1984 breakup of the Bell System into the
AT&T long distance company and seven regional Bell
operating companies (RBOCs).

The landmark agreement known as the Modified Final
Judgment (MFJ) was overseen by Judge Harold Greene and
capped almost 35 years of antitrust filings against the
Bell System.

After the divestiture, AT&T lost more than 70 percent
of its market value and faced competition
from other long distance companies such as Sprint and MCI.
In the intervening years since the MFJ, the division of
services, market forces, liberalized regulation, and
technical evolution created opportunities for a wide
variety of innovative competitors and entrepreneurial
start-ups, such as independent infrastructure providers,
specialty wireline operators, device and handset
manufacturers, convergence technology interests, and
wireless carriers. Competitors sprung up and, in some
cases, dominated markets that were non-existent before the
Bell breakup and telecom deregulation.

Since then, however, the US telecom market has been slowly consolidating and
working toward a duopoly dominated by Verizon Communications and AT&T. These two
companies are now among the market leaders in every sector of the market,
including wireless communications and broadband Internet access. They are also
driving forces behind the development and emergence of advanced services such as
fourth-generation wireless and very fast broadband Internet access.

However, they are now facing serious challenges on both the wireless and
wireline fronts. On the wireless side of things, the duopoly faces a surging
t-mobile and a bevy of smaller carriers all attempting to poach their customers.
Meanwhile, on the wireline side, companies like Comcast, Time Warner Cable,
Charter, and others have joined forces or are attempting to join forces to
consolidate into a single corporation that can meet or beat the network holdings
and service areas held by the likes of Verizon and AT&T. For the first time in
decades, the position of the telecom companies that sprung from the breakup of
the Bell System is no longer unassailable.

Description

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The modern telecom market and the stunning level of
competition in various segments was launched by Judge Harold
Greene when he accepted the deal between AT&T, operator
of the Bell Telephone System, and the DoJ that settled a
lawsuit that was originally filed in 1949, settled by the
“Final Judgment” in 1956.

Modified
Final Judgment

In 1984, Judge Harold Greene agreed to approve a mammoth settlement of an
antitrust lawsuit filed by the US Justice Department against AT&T and The Bell
Telephone System. Judge Greene essentially set himself up as an additional
regulator of the industry, retaining his jurisdiction to rule on issues
involving the MFJ. The agreement created seven RBOCs or "Baby Bells" and AT&T,
which retained its long distance operation, Western Electric equipment
manufacturer, and much of its Bell Labs research division. Many analysts believe
after seeing how the divestiture worked out that AT&T went into the MFJ
discussion with this solution in mind.

The breakup of the Bell System opened the doors competitors who not only
were competing in existing market segments but also to the development of new
products, services, and devices that could be used over the phone network.
Today's telecom landscape was largely created by to this "reboot" of a monopolistic
telecom industry of 30 years ago. One of the biggest changes that resulted from
the Bell Breakup and subsequent telecom deregulation is the diversity of
enterprises that make up today's telecom industry. The existing "telecom system"
is, in reality, comprised of many kinds of specialized enterprises which
collaborate to provide end user products and services: cell tower operators,
backhaul capacity providers, "last mile" regional and rural wireline service
providers, network gear manufacturers, handset manufacturers, and other niche
providers deliver support services and infrastructure capacity that underlie
consumer-facing telecom enterprises.

Telecommunications Act of 1996

In 1996, the US Congress enacted a sweeping telecom reform legislation (TA99) that
essentially amended the Communications Act of 1934. TA99 included mention of the
Internet and management of wireless spectrum for the first time. Another major
part of TA99 was known as the "Cable Services" section (Title 3). This
passage permitted, for the first time, media cross-ownership, which essentially
deregulated the broadcasting industry and made major players of cable giants,
Comcast, Cox, and Time Warner Cable. The removal of other regulatory hurdles
eventually lead to the merger of the seven RBOCs into three companies, AT&T,
Verizon Communications, and the much smaller CenturyLink (at one time US WEST).
Local service companies were permitted to offer long distance services out-of-market
immediately and in-market after opening their networks to competitors. Long
distance companies were permitted to enter the local service arena immediately.
All service providers were essentially given the right to buy companies
providing a full range of communication services and communications gear
manufacturers.

While people disagree about whether TA99 achieved its goal of nurturing
competition and fostering the development of nascent technologies, it is hard to
argue that TA99 is not as important to market consolidation as the MFJ was. In
the 20 plus years since passage in 1996 the entire market has been transformed. By removing much of the
regulation that made consolidation such an onerous process, companies went into
and out of business; a whole generation of companies died due to the Internet
and accompanying telecom bubbles bursting in 2000 and 2002; cable
companies became major competitors for the large telcos; and market
consolidation began in earnest.

As the US telecom industry looks to enter another phase
of consolidation, there are some predictable impacts
on these players, consumers, and major service providers:

  • Mergers and acquisitions in the industry almost always
    have negative short-term impacts on employment, as
    integrating companies strive to achieve economies of
    scale by reducing staff.
  • The wireless marketplace, which appeared to be headed
    toward a duopoly of Verizon Wireless and AT&T
    is less of a sure thing than it has been for more than a decade.
    Not only are competitors like T-Mobile seriously disrupting the
    industry in their own right, but a newly loosened regulatory
    environment under the Trump administration is expected to lead
    to the approval of mergers that would never have seen the light
    of day under President Obama or several of his predecessors.
    This means that the long-rumored T-Mobile/Sprint tie-up could
    once again be on the table, potentially creating a third player
    in the US wireless market on par with Verizon and AT&T in both
    network holdings and customer counts.
  • Like 4G before it, 5G will play a major role in determining
    which telecom companies are dominant during the next decade of
    service. In particular, telcos will want to choose wisely when
    determining the 5G protocols and technologies their networks
    will support. When companies like Sprint chose poorly during the
    early days of 4G and went with now obsolete technologies like Wi-Max,
    they were stunting their own growth potential for years to come.
    In fact, that single decision, and the subsequent slowness to
    react on Sprint’s part may have played a major role in the fact
    that it now finds itself in fourth place among major carriers,
    while the 4G-obsessed T-Mobile surpassed it to take over third
    place.
  • While the duopoloy of carriers may be in flux, the duopoly in
    the mobile phone industry is clearer than ever: Android and iOS.
    Although alternatives like Windows Phone and other niche
    operating systems do still exist, the vast, vast majority of
    smartphone users are on one or the other of these operating
    systems. While Apple’s restricted and monolithic control of iOS
    means that all devices running it were created and produced by
    Apple, Google’s Android currently runs on hundreds, if not
    thousands of varying handsets, tablets, and computing devices.
    The continued interplay between Google and Apple in their
    never-ending quest to outdo each other will see the carriers and
    telcos tasked with trying to keep up. Every time a new video
    streaming technology, graphically intense 3D game, or innovative
    communications feature makes its way into either iOS or Android,
    the telecom networks must be able to support it. This is
    becoming ever more difficult in a time when airspace and
    backhaul throughput is being stressed to its limits.
  • Making the situation for network capacity worse is the
    booming streaming media industry. In just the past few years,
    customers have begun demanding unlimited access to data
    primarily due to their hunger for streaming video and audio.
    These service, many of which have been around for the better
    part of a decade, have seen a major boom in both usership and
    usage. The result has been a massive swell in network
    utilization, with many urban areas of certain companies’
    networks struggling to keep up with the onslaught of customer
    demand. This is yet another reason why the upcoming rollout of
    5G technologies, with their increased speed and enhanced
    capacity, is so important.

Current View

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Although the cutting edge of telecom technology and services is the portion
of the industry that always gets the most attention, there are an unfortunately
large number of US citizens that still struggle to gain access to technologies
that have been widely available in large metro areas for many years. This this
end, the Federal Communications Commission and other regulatory agencies have
turned their attention to bridging this gap by encouraging and fostering the
deployment of broadband access, in its many forms, to rural and underserved
areas. This effort largely began with a speech announcing the United States
National Broadband Plan by then-FCC
Chairman Julius Genachowski. The Chair of the FCC outlined several shortcomings of the country's
telecommunications sector:

  • Not everyone has access to broadband service.
  • Not everyone who has access to a high-speed connection uses
    one.
  • Some people lack the computer skills needed to participate
    on the 21st century.
  • Network speeds are slower than the rest of the world.
  • The US mobile sector trails other countries in terms of
    speed and development.
  • There is not a mobile broadband public safety network for
    first responders.

As these facts are obviously unacceptable in a nation that strives to be one
of the technological leaders of the world, the US government instituted its
National Broadband Plan to bring modern telecom and Web-based technologies to
underserved and rural areas.


The US Broadband Plan

According to the most recent data published by the FCC, 10 percent of all
Americans still lack access to broadband speeds of 25Mbps download/3Mbps upload.
This benchmark, which was established in 2015, is the current goal of the
national broadband plan, replacing the old and outdated 4Mbps/1Mbps minimum
definition for broadband. When limited exclusively to rural citizens, this
figure jumps to 39 percent, meaning that broadband services remain unavailable
to 34 million Americans, 23 million of which live in rural areas.

Although this shows that there is still a massive amount of work yet to be
done, there has been progress. In survey take one year prior to the
aforementioned figures 55 million citizens lacked broadband access, with 22
million of these living in rural areas. This shows that, while great strides are
being made to expand broadband access in easier to reach and urban areas, not
nearly as much progress is being made in rural regions. The reason for this is
obvious: rural areas make it much, much harder to install telecom networking
equipment. In an urban setting, installing new access lines may be as simple as
attaching cabling to existing telephone poles or running it through existing
underground conduits. However, in rural areas the work most typically must be
done from the ground up, often literally. This raises costs beyond what is
feasible for most telecom operators seeking to turn a profit, and puts many
rural communities out of the running for ever being commercially viable
recipients of broadband connectivity.

To bridge this divide, the US government created the Connect America Fund.
The program began in 2010 with $4.17 billion in funding promised to it by 2013.
It is tasked with incentivizing the installation of broadband networks in areas
that would otherwise be financially unfeasible due to the aforementioned
obstacles. Since its creation, the program has gone through two phases:

  • Phase I: This included installations from Frontier Communications,
    CenturyLink, and AT&T. Work was slated to be done in a total of 37 states,
    with approximately $350 million being paid out to participants.
  • Phase II: This phase, which remains ongoing, saw the program gain an
    additional $1.8 billion in funding to support the previously mentioned,
    enhanced definition of broadband. Participants have included most of the
    same players as Phase I, with AT&T becoming the first to apply fixed
    wireless broadband technology to the task of reaching rural customers with
    the required speeds.

New technologies like fixed wireless broadband and 5G wireless do seem to be the
best direction for rural broadband network installers. Their reliance on
airwaves rather than wires to carry their signal means that many of
the geographical and geological obstacles that would face a wireline network can be
ignored. Because of this, wireless networking has already proliferated far in
excess of its wired counterparts, despite its relatively younger age. Below is a
chart detailing the availability of broadband by the delivery technology for
customers in the US.

Figure 1. Availability of Broadband in the US

Figure 1. Availability of Broadband in the US

Source: FCC National Broadband Map

The following maps show the availability of DSL, cable, and fiber-optic
broadband connections in the United States.

Figure 2. United States DSL Coverage

Figure 2. United States DSL Coverage

Source: Federal Communications Commission
National Broadband Map

Figure 3. United States Cable Broadband Coverage

Figure 3. United States Cable Broadband Coverage

Source: Federal Communications Commission National Broadband Map

Figure 4. United States Fiber-to-the-Home Broadband Coverage

Figure 4. United States Fiber-to-the-Home Broadband Coverage

Source: Federal Communications Commission

Ultimately, the National Broadband Plan estimates that it will take $24
billion in spending and subsidies in order to meet the goals outlined in it. The
government already invested nearly $7.2 billion under 2009's
American Recovery and Reinvestment Act, and the rest of the funding is supposed
to come from a variety of other government programs and by transforming the
Universal Service Fund so it can be used for broadband infrastructure.

Since the National Broadband Plan was introduced, the debate has continued to
rage over the best way to bring broadband services to underserved areas, and how
best to spend the government’s money to accomplish this task. While some have
praised the plan and its progress to date, others have called it bloated and
easily exploitable by the telecom providers participating in it. Questions have
arisen about whether the participants are really applying the government funds
to their best uses, as well. Although no one seems to believe the Connect
American Fund to be the perfect solution, it is the current US policy on the
matter, and has shown no signs of being replaced by any alternatives in the near
future.

That said, there exists the possibility that the efforts of the Connect America
Fund could be largely rendered unnecessary by the advancement of wireless
telecom technologies. As stated above, these wireless networks obviate many of
the physical needs of a wireline network by using radio signals to carry their
data. Although modern wireless networking signals can still be degraded by
physical obstacles, it remains much easier to deploy them in regions where a
single cell tower can provide coverage to the same number of citizens that a
hundred wire carriage towers would. Unfortunately, the 5G services that
may be able to provide this type of coverage remain years away. For now, US
cellular networks top out at 4G.


Fourth-Generation Wireless Services

Fourth
generation networks are often advertised as having 100Mbps download rates, an upload speed of
50Mbps or better. However, the actual speed delivered to the end user is
typically much closer to the 40Mbps range, in best-case scenarios. Often the
actual throughput is between 2M and
12M bps.

That said, the transition from 3G technology to 4G technology is essentially now
complete in the US. Now, companies are beginning the long ramp-up to choosing
their 5G technology standards and beginning to install and test their fifth
generation of wireless network.

5G Networks. As stated above, most 5G rollout plans are
still in their earliest days. Technological protocols are still being hammered
out, networking plans are under way, and throughput speeds are being pushed to
their limits. However, there are a few facts that can be discerned from even
this early work on the next generation of wireless technology.

  • Speeds and capacity will grow massively. This is likely
    the most important impact of 5G introduction. It means that the
    high-resolution streaming video that takes up so much of the current 4G
    infrastructure will have much more room to breathe. Additionally, more
    customers will be able to use the same throughput, freeing up network
    capacity for the growing number of customers and devices connected to
    wireless networks.
  • Coverage will improve. Although not all carriers have
    revealed their specific frequency plans for 5G coverage, most are relying on
    the lower end of the US wireless spectrum, with a major push towards the
    600MHz band. This lower end of the spectrum is better at both traversing
    long distances and at penetrating structures and terrain. The result of this
    will be better overall coverage with stronger signal strength and data
    throughput than the higher frequencies many 4G LTE installations are
    currently based on.
  • 2020 should kick things off. As previously stated, none
    of the major carriers in the US have committed to a specific rollout date
    for their 5G network. However, several have made promises for when their
    work will begin, with T-Mobile pointing at 2020 as the year when it expects
    to reach nationwide 5G coverage. Although some remain dubious of this goal
    and its feasibility, 2020 does seem to be the year most bandied about for
    when 5G services will begin rolling out to the masses. It is possible that
    some limited or pre-release markets will go live as early as 2018, but a
    widespread installation is likely to need at least several more years of
    gestation before reaching the public.

Industry Consolidation

Despite a tighter regulatory environment, the US telecommunications industry has
seen numerous major mergers in
the past several years. These have included:

Charter Communications Buys Time Warner Cable and Bright House
Networks.

Charter Communications moved into second place in the cable industry by
agreeing to purchase Bright House Networks for $10.4 billion and Time Warner
Cable for $55.3 billion. The new
Charter Communications now has 24.3 million customers across 41 states, while
Comcast has 28.9 million customers. The third largest provider is Cox, with 6.3
million subscribers.

Altice Buys Suddenlink.

Altice, a telecommunications company with operations across Europe, entered the
US cable market by purchasing Suddenlink Communications for $9.1 billion.
Suddenlink is the seventh largest cable company in the United States, with about
1.6 million customers in Arkansas, Arizona, Louisiana, Texas, and West Virginia.

Level 3 Communications Purchases TW Telecom.

Level 3 Communications acquired TW Telecom for $7.3 billion in October 2014.
Level 3 Communications made the deal to acquire TW Telecom's extensive
fiber-optic networks in 76 metropolitan areas across the US, which it plans to
connect to its global backbone that reaches 60 countries. With the addition of
these metro-area networks, the combined company will be better positioned to
compete against top-tier telecom companies like AT&T and Verizon.

AT&T Buys DirecTV.

AT&T agreed to acquire DirecTV for $48.5 billion in May 2014. The deal
closed in July 2015. The
combined company has 27.1 million video customers, making it one of the
largest television providers in the country.

As part of the deal, AT&T said it would expand its network to offer broadband
service to 15 million more people, including direct-fiber access to two million
homes.

Verizon Buys Out Vodafone.

In February 2014, Verizon Communications took full control of Verizon Wireless
buy purchasing Vodafone's 45 percent stake in the company for $130 billion.
Verizon decided to take full control of its wireless subsidiary so it could stop
paying dividends to its British partner and have full control over the mobile
business. Verizon Wireless accounts for 66 percent of the company's total
revenue.

The deal was so large that it dropped Vodafone from the second largest wireless
carrier in the world to the fourth, and it reduced its market capital in half.
In an article analyzing the deal, Bloomberg reported that AT&T could attempt to
buy Vodafone and give the global wireless company another shot at the US market.

Net Neutrality

Internet neutrality has
been a hot topic in the US for the last two years. The FCC narrowly passed a set
of rules known as the Open Internet Order in February 2015 that force telecommunications companies to treat all
Internet traffic equally. Since then, the rules have withstood multiple judicial
assaults from various telecom industry groups, with more expected to
follow. 

However, the biggest threat to net neutrality at the moment comes from the very
agency that put it in place, the FCC. New Chairman Ajit Pai was a staunch
opponent of the concept while working as a Commissioner under former Chair and
Open Internet Order co-author Tom Wheeler. He remains an even more outspoken
opponent of the concept now that he leads the FCC. Pai has laid out a plain
which will repeal nearly all aspects of the Open Internet Order. Opposition to
this plan has come from nearly every stakeholder on the Web, with the notable
exception of the telecom companies and ISPs that stand to make a significant
amount of revenue from the "walled garden" version of the Internet.

It remains to be seen whether the FCC will truly repeal net neutrality. So far,
the agency has shown little concern for the massive opposition to its plan, and
has even been accused of rigging its own comment system to make it appear that
the public is more receptive to the idea than it actually is. In any case,
should the concept of net neutrality be allowed to go by the wayside, many, many
individuals and smaller entities on the Web will likely suffer from the new
agency this would give major players like Verizon, Comcast, and others to divide
the Web up for their own financial gain.

Outlook

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Telecom consolidation has fallen behind the pace of other
technology consolidation. Simply, look at the software
market and see competitors disappear as more financially
stable companies buy them up. Oracle is a great example of
this, but IBM has been active along with Google, EMC, the
security software industry, and many more. There are,
however, some drivers that are expected to move
consolidation forward in the future.

Telecom Consolidation Drivers

As can be noted
by the acquisitions that were completed in the past few years,
companies are looking to extend its data networking capacity,
build out wireless networks, and add services to their
service portfolios that can be bundled with existing services.

  • Data Demand – About a decade after a predicted bandwidth shortage, followed
    by a bandwidth glut, service providers are finding that
    demand for cloud services, managed network services,
    wireless backhaul traffic, and data center operations
    have made it necessary to add fiber-optic network
    coverage as quickly as possible. One of the quickest
    ways to do that is through acquisitions as Zayo Group
    has shown with its rapid expansion and 20+ acquisitions.
  • 4G and 5G Wireless – The need for bandwidth is the leading driver behind
    current 4G
    wireless and upcoming 5G wireless installations. All the major
    wireless service providers in the US are in the process
    of rolling out 5G, but the lack of spectrum makes it an
    iffy proposition as to whether companies can actually
    complete their roll outs enough to support the continued
    explosion in demand from wireless customers, primarily
    smartphone and tablet users. All the major
    companies have petitioned the FCC to speed up the
    auction process to make more spectrum available, while
    trades, acquisitions, and mergers are being examine in
    the short term.
  • Service Bundles – All service providers continue to look to make additional
    services available to their customers, particularly
    because the average revenue per user (ARPU) grows
    incrementally with the offer of bundled services. The
    marketing agreements between Verizon Wireless and the
    cable companies is the biggest example of this trend,
    but the DirecTV and AT&T partnership is another
    example.

Globalization of Telecom Companies and Services

As noted early in this report, the pace of consolidation
internationally has continued at a faster pace than in the
US. This has brought about some deals in the US as
companies seek new markets for their networking and
business services. Level 3’s acquisition of Global
Crossing was almost entirely about access to networks and
business customers in Europe and Latin America. In
addition, Zayo’s acquisition of AboveNet was primarily
about its presence in Europe, a big reach for the small
networking group. It is anticipated that this
globalization will be a major consolidation driver as the
industry goes back into buy mode.

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